Hong Kong consumer goods

High-tech innovation in Hong Kong nears critical mass

December 11th 2017 | Hong Kong | Consumer goods

Hong Kong's technology start-up ecosystem has gained traction over the past five years or so. Financing remains critical to start-ups, but the emergence of a handful of large companies from the start-up sector will encourage investment by venture-capital firms. Meanwhile the government is providing greater financial support, particularly for research. Nevertheless, with other cities also upping their game, it is far from certain that Hong Kong can emerge as a global centre for technology and innovation.

The circumstances necessary to nurture up-and-coming technology start-ups are often described as an ecosystem. This encompasses the idea that a successful environment for tech start-ups requires a complex network of factors, including a supply of finance, talent and infrastructure, a market for services, and support from associated systems such as tax and regulation. The difficulty for any economy seeking to build a technology start-up ecosystem is that, in the initial years, talent will be lost to more mature locations, such as California, which offer more obvious attractions to footloose, well-educated tech workers. After many years of struggling with this problem, Hong Kong's tech sector appears to be nearing the point where critical mass is reached. If handled well, this could form the basis for the future development of a high-tech start-up system.

The infrastructure for start-ups is falling into place

Hong Kong has sought to nurture the technology sector for nearly two decades. In 1999 the government announced plans to build a Cyberport (a business park for the information technology, or IT, sector with residential and hotel elements), which came on stream in stages from 2002. The city's Science Park also has a start-up incubation programme. Meanwhile, in 2012 The Hive and CoCoon opened their doors, offering a Silicon Valley-style co-working space for short-term rentals, with a focus on entrepreneurs. Then in 2013 InvestHK (the government investment promotion agency) set up StartmeupHK, an annual fair to encourage technology start-ups.

These initiatives have taken time to bear fruit. However, a survey by InvestHK showed that in 2016 Hong Kong had 1,926 start-ups employing 5,229 staff. Both the number of start-ups and the employment that they provide are growing rapidly. Other firms, including global providers such as WeWork, have followed The Hive and CoCoon into the co-working space. Hong Kong's openness to foreign talent has played a role in catalysing the entrepreneurial mini-boom: around 35% of the start-ups that responded to InvestHK's survey in 2016 had not been founded by locals. Areas focused on by start-ups in Hong Kong include artificial intelligence (AI) technology, online brokerage platforms, online lending platforms, e-commerce platforms, wearable mobile technology, travel booking platforms and gene testing for insurance policyholders.

Government money will help to raise R&D spending

The government is anxious to build on this progress. In early 2017 it announced a HK$2bn (US$256m) Innovation and Technology Venture Fund, through which the government will co-invest with venture capital in eligible start-ups. At least HK$10bn in funding for university research and for student scholarships has also been promised. Other initiatives include tax deductions on research and development (R&D) spending on innovation that go as high as 300% of the amount spent, and a large tax cut for small and medium-sized enterprises. It is unclear how successful these moves will be: start-ups tend to lose money, so are less concerned about tax rates, and there is a risk that high R&D deductions will merely encourage the relabelling of spending. Nonetheless, the overall direction of policy is likely to prove positive in terms of stimulating research and innovation.

By these means, the government aims to double R&D spending to 1.5% of GDP between 2017 and 2022. This would be an impressive achievement. However, it is important not to overstate the progress currently being made: R&D spending in South Korea, for example, was around 4.2% of GDP in 2015. Moreover, Hong Kong's technology sector faces many of the same problems as other industries, including high property costs, which also make talent expensive to recruit. The Science Park is planning 500 residential units, which will be convenient for those who use its facilities. The government also aims to address the problem of high commercial rents by making 60,000 sq ft of space available to entrepreneurs at one-third of the market rate.

Unicorns are drawing interest

Hong Kong's relative small tech start-up sector has nowhere near the depth and breadth of the IT industry in California or South Korea. Nevertheless, interest in the sector will be fuelled by the emergence of Hong Kong's first three start-ups with reported "unicorn" status (companies with market capitalisation in excess of US$1bn). The first of these was GoGoVan, which is mainly a business-to-business platform to arrange van deliveries. GoGoVan recently merged with China's 58 Suyun, a consumer-oriented logistics-on-demand platform. GoGoVan's early development was supported by funding from the Entrepreneurship Fund set up by a Chinese e-commerce giant, Alibaba, which also has an investment in 58 Suyun. A rival logistics platform, Lalamove, has a presence in 100 Chinese cities and is also nearing unicorn status.

The two other Hong Kong-based unicorns are WeLab (which operates both the WeLend online lending platform in Hong Kong and the Wolaidai mobile lending platform in China) and SenseTime (an AI-focused venture that has filed 500 patents in areas such as facial recognition and identity-verification systems). SenseTime was founded in the Hong Kong Science and Technology Park in 2014 by academics and researchers at the Chinese University of Hong Kong and now employs 800 staff in China, although most of the company's 140 or so PhD-qualified scientists are located in Hong Kong.

These examples highlight the importance of funding for start-ups. Corporate sponsorship and government programmes will help, although the government has yet to demonstrate that it can direct its spending in this area in an effective manner. This will be complemented by a developing venture-capitalist sector interested in financing early-stage start-ups before they become unicorns. The Hong Kong stockmarket is also emerging as a useful channel for raising funds for technology firms.

Challenges still lie ahead

Hong Kong is a relatively small market in itself, beyond certain niches such as the financial services sector, but it is increasingly integrated with the massive mainland-Chinese economy. Potential demand is thus not a major obstacle for most start-ups. A bigger problem is Hong Kong's lack of a major tech giant to catalyse and drive developments in the sector. This challenge may be addressed by deepening links with Shenzhen, where many Chinese technology companies are based. An innovation and technology park announced in January 2017 in the Lok Ma Chau loop, adjacent to Shenzhen, will support link-ups, as will the wider Greater Bay Area development initiative, which encompasses both Hong Kong and Shenzhen.

The prospects for development of the technology and innovation sector in Hong Kong are brighter than they have been in years. Committed government support, particularly through research funding, will play an important part in ensuring that the momentum behind the sector's growth is sustained in the next few years. Nevertheless, while the start-up sector appears to be doing well, it remains vulnerable to a potential reversal of the current favourable economic climate, while the absence of major tech players is a notable weakness. Moreover, other cities around the world are also developing their own start-up ecosystems, so that competition is getting fiercer. It is still too early to say that Hong Kong has emerged as a regional or even global innovation hub.